IRAs for Kids: It Is Never Too Soon
What's the best age to start saving for retirement? A common answer is when you start your first "real" job and can sign up for a 401(k) or other plan offered by your employer.
But often children are working long before that. If their parents encouraged it, probably even more young people would do appropriate work, such as babysitting or dog-walking, for pay. And that's all it takes to do what may be the best way to help your kids get a head start on retirement savings: Put some or all of their earnings into an IRA.
The demise of traditional pension plans, uncertainties about the future of Social Security, and the increasing reliance on 401(k)-type plans to finance retirement are all good reasons to expose your children to the idea of retirement savings at an early age, many financial experts agree. What's more, with the potential of 50 years of compounding returns, even a modest amount of money in an IRA now can turn into very big bucks.
Record-Keeping Is a Must
Eligibility to make IRA contributions requires having income from work rather than from gifts or inheritances. The work can be for other people, such as your neighbors, or for your own business. If you're self-employed or have a small business, you can hire and pay your children, claim a deduction on your business taxes, and insist that the children put their earnings into an IRA.
It's important that you keep detailed records. Financial planners I spoke to said if you're basically having your own child do chores in return for an allowance, don't try this. If your child is working for others, then keep a log of dates, the type of work, and the employer.
If your children insist that they'd rather use their earnings for video games and Roller Blades instead of retirement, try this: Open the IRA with their earnings and then give them a gift equal to what they invested. That way, they'll have money to spend and perhaps, over time, they'll be impressed at how the IRA account grows and decide to keep on contributing. (The IRS doesn't require you to report gifts as long as they're under $12,000.)
Aggressive Is O.K.
So what does it take to set up the account? The child is eligible to deposit some or all of his earnings, up to $4,000 per year, in the IRA. You set up the account using your child's Social Security Number with a financial-services company. You may need to shop around.
For example, Fidelity won't allow anyone under 18 to have an account in his or her own name, but Vanguard will. Until your child turns 18, you're the custodian of the account and children can't take the money out independently.
Investment options are the same as with any other IRA. Investing aggressively for my kids should not be a concern since it's such a small amount of money and the child's account literally has 50 years in which to grow. Discussing how to invest the money could be educational and also a way to get your children more involved in and committed to the account.